Why wealth becomes concentrated

“The rich get richer and the poor get poorer,” says the porch philosopher. “It takes money to make money.”

I heard these phrases from “old” people when I was in first grade. Now I’m one of them, and I’m still hearing them. Usually, the speakers are explaining why their star didn’t rise so far, using these conclusions to demonstrate the futility of trying to achieve any wealth at all.

“They’ve got it all wired,” he says, as he rocks back and forth, a sausage stick hanging out of his mouth. Through a thoughtful chew, he says, “They only help each other, those in the club.”

It’s tempting to think that “it’s not what you know, it’s who you know.” Personally, I’ve found it to be both, or rather “it’s who knows that you know what you know.” Believing that one is being left out on purpose relieves one of responsibility and the distasteful prospect that hard work could actually pay off.

We’d rather think that there are people who want to keep what they have and get more for themselves, their relatives and favored friends. But not for us.

A three-century study of economic data from key countries that created capitalism shows that even if there are patterns of cronyism and corruption over time, the real reason why a small fraction of the population ends up owning most of everything is found in a simple inequality within the statistics of economics.

Thomas Picketty, a French economist, deconstructs the world’s economies since 1700 in a recently released book called “Capital in the Twenty-first Century.” The work has been met with both critical acclaim and peer controversy. Picketty’s political and social views are evident in the writing, but he does a good job pointing out when he’s offering his opinion and when he’s presenting the data as mined.

Picketty argues that the cause for the concentration of wealth is the apparent law that return on capital always exceeds the economic growth rate. Over time, capital accumulates to the degree that the investment return is not entirely used; it is reinvested and thus amplifies the principle in logarithmic fashion. The magic of compounding.

There is a concurrent variable that influences the stability of this law of capital. It is the fact that in most times and most places, accumulated capital ownership can be passed on to one’s heirs. The taxes on inheritance, Picketty says, have historically been zero to low, with various spikes and dives.

By the time great-grandson Billy gets what three generations accumulated previously, the pile has grown far beyond what each generation could have earned by its own efforts in a lifetime.

Over the 300 years of Picketty’s explorations, he shows that wealth concentration has remained high, with the top decile consistently owning from 50 percent to 90 percent of capital stock through the years. There is one era that stands out as the marked exception.

The years between 1910 and 1945, about 10 percent of the period of the study, saw the eradication of the wealthy class in Europe. The older Western countries had their entire capital stock and infrastructure nearly wiped out from two world wars and a global economic depression, the worst in recorded economic history.

The United States hadn’t quite gotten as stratified in wealth distribution as old Europe, and its national assets were not damaged in the wars, so the change was less dramatic. However, in both the United States and Europe, wealth and income inequality fell to their lowest level in three centuries.

The period that followed was the birth of a nominal middle class, that is, the middle 40 percent of the population that owned about 25 percent to 35 percent of national wealth from 1940 to 1980.

The middle class has been losing ground in both wealth accumulation and income since then. The structure of wealth equality is returning to the stratifications of the Victorian period. I noticed this about 20 years ago, and thought it was because of nefarious motives at the top of the pyramid.

I thought politics, corruption and elitism were the causes. After reading Picketty, I must admit that it seems there is strong evidence for the issue to be structural, not intentional.

If we want to increase wealth equality to the prosperous period of the post-World War II boom years, when an average person could earn enough to feed and house a family of four, we need not change the law of inequality Picketty identifies. We simply need to outlaw inheritance. It would all go to taxes or philanthropy. This is what Warren Buffet recommends, and I’m beginning to understand why.

Why would we want to increase wealth equality? Well, another trend that Picketty identifies is that there appear to be cycles of social upheaval that follow the highest points of wealth concentration. When there are too many have-nots, they tend to act collectively to disrupt the quiet enjoyment of wealth by the wealthy. These actions range from irritating public-service strikes to increased crime rates to revolutions.

It’s a bit of a relief to see the structural nature of inequality, and not just the base human motives of “me first” in operation. But it doesn’t change the fundamental question: Should policymakers adjust the dials of capitalism to increase equality so that social and economic equanimity result?

Sewitch is an entrepreneur and business psychologist. He serves as the vice president of global organization development for WD-40 Company. Sewitch can be reached at sewitch1@cox.net.

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